Improving profits and cash flow must be the talk of the day of eCommerce businesses worldwide, especially for those who have been hit by the effects of the current COVID-19 pandemic.
Our dear guest, Jill Liliedahl, the Business Development Manager from Inventory Planner, has brought into discussion the topic of demand forecasting (remember cash flow forecasting?).
Together with our Head of Product Marketing, Juliana Jackson, this episode was filled with lively discussions about fulfillment, inventory investment, demand forecasting (of course) and many smiles amongst this difficult situation we’re all in.
After all, we’re all in this together, right? Because, heads up:
Q4 I think is going to be super intense.
Who is Jill Liliedahl?
After six years as an entrepreneur, four running an eCommerce company and three as an Inventory Planner customer, Jill Liliedahl now works with merchants to be more efficient and make smart purchasing decisions.
Key takeaways from this episode
Inventory priorities in times of crisis
There are a couple of different sides to it.
- Getting products in time from your suppliers.
- Getting it to your customers on time.
We’re at the beginning of August right now. If you have overseas suppliers, order now for the holidays. It is not too early! If I were on the merchandiser side right now, I would get on top of it. I would put those orders in. I would get them going just to be sure that we’re not getting into bottlenecks and that’s if I’m shipping to my own warehouse.
I think if you’re selling on Amazon, they’re definitely dealing with backlogs in receiving and some of that is better than it was a couple of months ago. But still, there’s kind of a backlog there. I think we’re getting into Prime Day, which is tentatively scheduled for October. That’s going to create a receiving backlog, then we’re immediately into the holidays. So I would just put everything really early and anticipate a ton of online demand.
There are a bunch of things coming together I would be planning on the conservative side and just buffer in more time to my lead time and say, “OK, I normally plan on – if I’m ordering from China – maybe 90 days, maybe I put another 14- 30 days on that.” I really would just plan in more time due to all of these backlogs for receiving and shipping and everything.
From a forecasting perspective, it depends on the sector. eCommerce overall has been up a lot but that doesn’t apply to everybody. You could be in a niche that maybe it doesn’t apply to you, but for a lot of the merchants we’re talking to, they’ve seen tremendous sales over the past couple of months and then stack on top of that some of the things I mentioned before: Prime Day, Black Friday, Cyber Monday.
Definitely plan early as much as you can, plan for things to go wrong. In my experience, it’s rare that things just go according to plan 100%. I always am a little paranoid about what possibly could go wrong about this, so [my advice is to] plan in some extra time to work out some of these issues, plan in some buffer.
Why should merchants forecast customer demand?
From a merchant perspective, cash flow is everything. What we’re trying to do is have an investment in inventory and turn that over into revenue as fast as possible.
There are two sides to that coin:
- We don’t want to miss out on revenue. We want to have what people want when they want it. So if you’re selling seasonal products, we don’t want to have it in August when people really want it in December because that’s tying up your cash.
- The other thing is overstock. You don’t want to commit too early. So we want to have it when people want it and we don’t want to have too much of things when they don’t want it because that’s cash that’s not turning over (stock turn is the term for this).
The stock turn is very slow. So our cash is tied up. We can’t put it into areas of our business where it’s going to be more efficient. Whether that’s a different inventory that’s going to be faster moving or it could be something in towards acquiring new customers, keeping and retaining new customers to your point, wherever that’s gonna be most efficient in our business.
Demand planning, demand forecasting is really helping with that process. It’s using what’s happened in the past because the best indication of what will happen in the future is how people spend their dollars in the past. Let’s look at the past behavior where they’ve actually spent money, and say, “OK, what does that tell us about the future?” We need to think about what is the relevant time period in the past. Think about what’s that relevant period that will indicate what’s going to happen in the future.
Another step is to think about when you’ve been in stock and out of stock. This is something that our system can help with. If you have a fairly small catalog you could manage some of this manually on your own. But once you’re hitting scale, it can be kind of difficult.
The baseline is really thinking about what’s the relevant period of data that I’m looking at. Then to kick it up another notch, you’re looking at when I was in stock and out of stock, how much the customers purchased when we had these items available.
Key metrics for the best ROI for your inventory investment
When you’re looking at moving to a system whether it’s Inventory Planner or another system, think about the value of your time and how much time you’re spending on forecasting manually with spreadsheets.
It’s really common that I talk to merchants who say, “I have a full-time person just exporting data. We only forecast once a week, once a month and we’re not doing a great job at it. With this system, we can grow. We can have that person pay attention to bringing in new products or reallocate their time.”
Some situations where software can be more helpful are if you’re selling on multiple channels or have multiple warehouses, so each location or each sales channel has its own personality. If you have an East Coast or West Coast warehouse, people want different things, they sell at different rates, so you need to think about all of these different things that can have different lead times. It takes a different amount of time to ship from the supplier to West Coast versus East Coast warehouse.
Within your catalog, another complexity can be if you’re handling bundles or kits or assembled products. You need to look at the components of that. So every sale of our finished good or our kit needs to translate as demand for its components. So those could be components that we either sell on their own or don’t.
In terms of prioritizing what to get back in stock, we can look at forecast lost profit, we can look at what we call replenishment costs – the number of units we need to order times the cost price. That’ll be the amount on our purchase order. You could also look at forecast lost revenue.
In particular in fashion, we’ll look at stock turn because if something’s trendy right now, it’s got to move, we can’t have it sitting around. It’s really losing value in several ways. Stock turn is just looking at how long it takes between acquiring the inventory and moving it out the door to our customers.